TALKING MONEY WITH: ELI BROAD;Investment by Delegation: The Art of Knowing Who Knows

WHAT does a man with a fortune valued at well over $800 million do when the stock market drops 171 points in one day, causing panic on Wall Street and pandemonium in the press?

If he is Eli Broad, the 62-year-old silver-haired chairman of SunAmerica Inc., a financial-services company with multibillion-dollar assets, he does absolutely nothing. He doesn't even phone his money managers.

True, there are some restrictions on what Mr. Broad (rhymes with road) can do with his investments. He has $140 million in various equity partnerships, for instance, and these vehicles for wealthy folks allow them to take out their money just one day a year, or even less often. But even Mr. Broad's decision to use such illiquid funds sounds a larger theme of his investing style, one that well explains his low-key approach when stocks plummeted on March 8: He avoids picking stocks and, generally, playing the market himself.

"I think over any period of time, especially if you don't use leverage, it is difficult to continually beat the S.& P. 500," said Mr. Broad, voicing an idea he repeated during interviews at his New York penthouse and his home in Bel Air, Calif.

That is striking advice coming from a person as rich and relentlessly ambitious as Mr. Broad, a solid member of the Forbes 400. Beyond the partnerships, Mr. Broad has a $50 million interest in Stanford Ranch, which is a California housing development, and a modern art collection valued at $100 million to $200 million. And then there is the bulk of Mr. Broad's wealth -- more than $500 million in equities.

Virtually all of that is in SunAmerica, his own company, and Kaufman & Broad, a home-building concern of which he was a co-founder in the 1950's. For Mr. Broad as for most entrepreneurs, these holdings are not elective investments; they are the centerpieces of their careers and the signs of their success.

WHEN it comes to his true investments -- those independent of his work -- Mr. Broad's aversion to direct stock picking comes through. He has directly selected less than $10 million in stocks -- not much for an almost billionaire. That small clutch of equities includes Royal Dutch Petroleum, Archer-Daniels-Midland and Fannie Mae, where he once served on the board.

This reluctance to select stocks -- one that his two sons, who are active investors, do not share -- does not spring from a lack of self-esteem. Dressed in an elegant gray suit at an interview in Bel Air, the trim, fit Mr. Broad is intensely self-promotional, focusing on his successes and sometimes resisting discussion of specific past mistakes.

This confidence is no mystery; Mr. Broad, the child of Lithuanian immigrants, has come a long way. His father, a house painter and small merchant, came from a ghetto and traveled steerage to the United States, Mr. Broad said; his mother, whose family was in the timber business, came first class.

Mr. Broad grew up in Detroit and, at the age of 23, decided to set up his own accounting firm. But he quickly noticed that some clients who were home builders were doing very well. "I was newly married with a baby, and that aroused my entrepreneurial instincts," he said. "I borrowed $25,000 and went into business with Don Kaufman. He was 10 years older and a real builder.

"Three years later we built our first houses, and the first week we sold 17 -- or maybe it was 11," Mr. Broad said, pausing briefly in a rare moment of uncertainty. By 1960, the Kaufman & Broad Home Corporation was a success, and he was a millionaire.

In 1971 Mr. Broad decided to diversify, and bought a life insurance company that became part of Kaufman & Broad. In 1989 the insurance business was spun off from the building company, and SunAmerica was born, with Mr. Broad as chairman. Selling variable annuities and other retirement vehicles, the venture was intended to ride the wave of baby boomer retirements just as Kaufman & Broad had ridden the boomer housing explosion.

The move was another victory for Mr. Broad. SunAmerica had total assets of $16.8 billion in fiscal 1995, up 15 percent from the previous period. And its stock has nearly doubled since the start of last year, closing Friday at $48.375. These are numbers of which Mr. Broad is immensely proud.

Despite such 20/20 business vision, however, Mr. Broad is firm about steering clear of equity selection. One reason: "I don't have time to pick individual stocks."

And he says other investors should follow suit. "Regardless of what Peter Lynch wrote," Mr. Broad said, referring to "One Up on Wall Street" by the famous money manager, "I don't think it makes any sense for an individual to invest in common stocks unless they know the company, work at the company, and so on."

This is not mere theory for Mr. Broad. When he was making his mark in home building, he tried stock picking and found it was not his forte. "The results were O.K., but they were not great," he recalled.

Though he said he could not remember his specific mistakes during that period, he did cite a general failing: a poor sense of timing. He faults himself on another score, too. "I think I did as well as the market," he said, but "I am not good at understanding the psychology of the market."

Even for talented investors, though, Mr. Broad suspects the chances of consistent outperformance from stock picking are slim.

"What is the market today? It is mostly a professionally, institutionally run market" of large firms, he said. "Over time, some of them will do great. Some will be lucky. They will be heavy in technology stocks and then that will blow up. And then they will be heavy in financial services stocks. But over a period of years, I think, it is tough to continually beat the averages."

That doesn't mean Mr. Broad won't try. But instead of picking stocks, he picks people. Specifically, in selecting the 20 partnerships in which has has invested about $140 million, he searches for people who have terrific track records and whom he considers both smart and tough.

He is particularly high on Theodore J. Forstmann, who runs Forstmann Little, a leveraged buyout firm. "I want people who are really running the funds, who are living them day to day. Teddy dies when he loses. He is a great competitor. Have you ever seen him on the tennis court?"

Among the other money managers who have gained his confidence are Odyssey Partners, a hedge fund run by Jack Nash and Leon Levy, as well as several funds managed by Goldman Sachs. He also invests with David Bonderman, a former senior executive for the Robert M. Bass Group.

FOR all his skittishness about selecting individual stocks, Mr. Broad does not shy away from risk if he can find the right manager. "If I want big capital appreciation, I will go with people like Forstmann Little and others who use leverage," he said.

While these ventures can lose big, at times they pay handsomely. Consider Forstmann Little's most recent coup, the sale of computer magazines owned by Ziff- Davis. Forstmann Little had paid $1.4 billion for the properties in December 1994. Eleven months later, Japan's Sofbank Corporation bought them for more than $2 billion. For Mr. Broad, the deal turned a $5 million investment in 1994 into an $11 million check, which he received last week.

The Forstmann partnership also invested $200 million in General Instrument, a maker of cable television equipment and other goods, in 1990. The fund has taken $1.1 billion out of the company since then, and still owns 15 percent, which is valued at $600 million.

Average investors are unlikely to reap such outsize profits from these partnerships, which are primarily vehicles of the wealthy. But for the less well-heeled investors, Mr. Broad still recommends selecting people or a firm rather than nosing around for individual stocks. "Have confidence in the person, and if it is a new approach, try to get some clarity about what they are doing, and a track record," he said. For the average investor, that often means assessing mutual funds. "Go to a good fund," he suggested, "like Fidelity."

But Mr. Broad has one big red flag in the search for money managers: mathematical formulas for outsmarting the market. "It's like someone going to a casino and saying, 'I know how to beat the casino,' " he said of this "dogmatic" approach. "I think the market is relatively efficient and it's hard to beat it a whole lot."

Whatever his views on stock picking, when it comes to collecting art Mr. Broad is aggressively hands-on. Introduced to the field by his wife, Edythe, he has 300 works of modern art, by artists like Robert Rauschenberg, Jasper Johns and Roy Lichtenstein. And his research in this area is encyclopedic, said Lorinda Ash, an art dealer.

"He goes into every auction knowing the history of every painting he is interested in, and comparative sale prices," she said.

BUT while he has an eye on the price tag, Mr. Broad maintains that art is not an investment. "All that happens when it appreciates is that you pay more insurance," he said. "A real collector does not sell."

And even if art is considered an investment, it seems to be a poor one. "If you go over a 40-year history, you would do better in common stocks," said Mr. Broad, who plans to bequeath his collection to his own foundation and other institutions. "There were periods when the art market got overheated, but there is no reason it should appreciate dramatically."

While Mr. Broad's investing philosophy dwells on his limitations -- no time, little grasp of market psychology -- he also must grapple with another limit: failing to convert his family to his views. Over tea at the family's Bel Air home, Ms. Broad, an attractive, dark-haired woman, laughingly acknowledges that she shares little of her husband's passion for business or investing. According to Mr. Broad, her idea of investing is money market funds and certificates of deposit. But he does reluctantly honor one of her financial preferences.

"We don't have any mortgages," Mrs. Broad said as she sat in her library, the lone cluttered room in an impeccably kept house designed by Frank Gehry. "My mother always said you could sleep better at night if you owned your own home."

But when it comes to their two sons -- Jeffrey, 36, and Gary, 39 -- the father's investment regimen is turned completely on its head. Neither man works full time and both expend much effort at the one financial activity of which Mr. Broad is skeptical: picking stocks.

Indeed, the market is Jeffrey Broad's main interest; he even worked for several years on the floor of the Pacific Stock Exchange.

"When I was growing up he introduced me to stamp collecting and the stock market," Mr. Broad said, referring to his father. "If he had introduced me to stamp collecting and accounting, I might have turned out more like him."

Mr. Broad concedes that his two sons have done respectably, even if their approach collides with his investing principles. "They do well," he said. "They know more about technology stocks than I do, and they did very well with some, though I forget which ones."

But compared with top money managers, "they are not that bright or sophisticated, let me put it to you that way," Mr. Broad added. He also noted that the rise in the value of SunAmerica stock -- he had given his sons "a certain amount" of shares years ago -- was the biggest reason for their portfolios' success.

And the sons lack their father's intensity, he believes. "They are not stupid," Mr. Broad said. "They are hardly unsophisticated investors. But they don't live it the way I do. They enjoy other things in life."

Like any father, Mr. Broad often ponders the tenor of his sons' lives. "They are both retired," he said. "They are leading my fantasy life." Then he added with some wistfulness, "If I could wave a wand . . .," and his voice trailed off. "We would like for them to be married, to have grandchildren, to be running a big enterprise," he said. "But that is not what they wanted to do. It doesn't make them happy. They saw me work too hard." (Several weeks later, Gary Broad surprised his parents by marrying.)

As for Mr. Broad, he uses the time freed up by his anti-stock-picking rule to hone other financial skills. One recent coup: he used his American Express card to pay $2.4 million for a Roy Lichtenstein painting in order to get the frequent-flier miles. He has yet to use them, though, and said he might give them to charity.

But now for the most-awaited question. If this fantastically successful businessman and near-billionaire did buy an individual stock, just one, which would it be?

"I hate to pick the competition," he said, alluding to his answer's rivalry with SunAmerica. "But they have a huge customer base, first-rate technology, good distribution and an established brand."